The eurozone economy returned to growth in the first three months of the year as output expanded by 0.1 per cent. But the figure undershot economists’ expectations of stronger growth as stagnation in Germany, the region’s largest economy, offset expansions elsewhere in the bloc.
The figures, which follow no growth over the previous quarter, confirm that the eurozone will avoid the winter recession that many predicted would follow last summer’s energy crisis, triggered by Russia’s invasion of Ukraine.
The eurozone’s economy is now 1.3 per cent larger than in the first quarter of 2022. That compares with US growth of 1.6 per cent over the same period. and a 4.5 per cent expansion of the Chinese economy in the same period.
But most economists are forecasting only weak growth for the rest of this year. Melanie Debono, an economist at research group Pantheon Macroeconomics, said the region’s performance would “remain subdued” in the second and third quarters as “softer bank lending pulls down investment”. Others expect a slowdown in the US and sticky inflation to weigh on output.
The growth figure, coupled with data showing inflation remained high in several eurozone countries, complicates the challenge facing the region’s rate-setters, who must decide whether to raise borrowing costs when they meet next week.
Investors took the data as a sign the European Central Bank was likely to slow its interest rate rises when it meets on May 4. German two-year bond yields fell 0.16 percentage points to 2.7 per cent, while the euro dropped 0.4 per cent against the dollar to $1.0985.
Analysts remain divided on whether the ECB will switch from a half percentage point rate rise to a quarter point move next week. Policymakers have said incoming data will be decisive.
Germany’s failure to grow was an improvement from a 0.5 per cent decline in the fourth quarter, but it was weaker than the 0.2 per cent growth forecast by economists in a Reuters poll.
However, the French, Italian and Spanish economies all saw output accelerate from the previous quarter. Italy and Spain both recorded stronger than expected growth of 0.5 per cent in the first three months of the year.
Growth in several of the bloc’s biggest economies was boosted by strong export sales, which offset declining or stagnant demand from households. Portugal had the strongest growth, recording a 1.6 per cent expansion, while the weakest performer was Ireland, with a 2.7 per cent contraction.
French growth accelerated to 0.2 per cent, up from 0.1 per cent in the fourth quarter of 2022 and in line with expectations.
However, inflation in the eurozone’s second-largest economy increased more than economists had forecast, rising to 6.9 per cent in the year to April from 6.7 per cent in March.
Inflation in Spain also increased to 3.8 per cent in April, up from 3.1 per cent in March. However, core inflation, which strips out energy and unprocessed food prices to give a better indicator of underlying price pressures, dipped to 6.6 per cent in Spain from 7.5 per cent a month earlier.
The IMF has told central bankers in Europe not to pause or relent in their attempts to tame inflation, saying it was better to over-tighten policy than risk permanently higher price pressures.
Alfred Kammer, the director of the IMF’s European department, said this week that core inflation will prove “much more persistent” than people expect, and that rate-setters should not relax — even though headline inflation is now far below the peak of 10.6 per cent recorded in October 2022.
The ECB has already raised rates at an unprecedented pace in an attempt to bring eurozone inflation down to its 2 per cent target. It has increased its deposit rate from minus 0.5 per cent last summer to 3 per cent in March. The latest figures for eurozone inflation are due out on Tuesday.
“The bigger picture is that, even as Europe recovers from the energy crisis, the tighter monetary policy which has followed hard on its heels will weigh on investment and consumption,” said Andrew Kenningham, an economist at research group Capital Economics.
Economists forecast eurozone growth of 0.2 per cent in the first quarter, according to a Reuters poll.
